Commodity Stocks Still Presenting Buying Signals (BHP, APC)

Swing traders continue to capitalize on a handful of commodity stocks that are moving in rising trend channels. A channel can end at any time; however, while the channel lasts it provides opportunities for traders to buy near the bottom of the channel and sell near the top. These are technical trend trading opportunities, taking advantage of rising prices and short-term price patterns that have been repeating continuously for the last year.

BHP Billiton Ltd. (BHP) bottomed at $18.46 at the start of 2016 and has been rising in trend channel since. Numerous opportunities have occurred over the last year to buy near support and sell near resistance. Support and resistance can be seen using trendlines. Trendlines are simply a tool to highlight potential trading areas. Therefore, they don't need to be drawn exactly along highs and lows. Rather, they should be drawn to "best fit" the price action. Drawing trendlines in this manner tends to work well for this type of strategy.

In February, BHP started pulling back toward support in the $37.50 region. That is a potential buying area, with a target near the top of the channel between $41 and $42 (a conservative and an aggressive target, respectively). On Feb. 10 the price jumped back up into the $40 region. For trading purposes, waiting for an entry closer to $37.50 provides a better risk/reward ratio trade. A stop loss goes below $36.50, providing for a short-term trade with up to a 4.5:1 reward-to-risk ratio.

Anadarko Petroleum Co. (APC) shows that trend channels may need to be redrawn, over time, to capture the major opportunities. In early 2016, the trend was steeper but has flattened out since mid-2016. The rising channel is still providing buying opportunities, with the price falling toward support near $65 in February. The price stayed in this area briefly and then jumped up again on Feb. 9 and 10. Instead of chasing the price, patiently awaiting an entry near $65 provides a better risk/reward trade. The upside target is the top of the channel at $74 to $75, while a stop loss is placed below $63. That's about $2 of risk in exchange for up to $10 in profit/share.

Marathon Petroleum Corp. (MPC) bottomed at $29.24 in early 2016 and has been in an uptrend since. The channel isn't as well defined in this stock, but the rallies and pullbacks still provide buying opportunities...just like any other trend. In January, the price pulled back and then stalled in the $48 region. Between $48 and $49 is one potential buy zone. Entering in that region will require a slight pullback from Feb. 10 closing price of $50.14. A stop loss can go below $46.75, and the upside price target is near $54.

Trendline support is near $46, so that region could present another buying opportunity if the price drops a bit more.

The Bottom Line

Trading trend channels can work out very well while the channels last. Eventually, the channel will break, though. Or, the price may fail to reach the target or move through a stop loss level. Losses are a part of trading, which is why the potential profit of a trade should outweigh the risk. That way, a winning trade can more than make up for one, two or even three losing trades. Slight alterations on the entry point can significantly impact the risk/reward of a trade. For example, buying Marathon at $48 provides a 4.8:1 reward-to-risk, while buying at $49 provides a 2:1 reward-to-risk. Patience and waiting for the bit better price will often produce much better trading results, even if waiting means occasionally missing out on a trade.

Disclosure: The author doesn't have positions in the stocks mentioned.

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